The Fragility of Commitment
17 Pages Posted: 20 Feb 2011
Date Written: February 19, 2011
We show that the value of commitment in many standard games is fragile. Specifically, when the second mover faces a small cost to observe the first mover's action, equilibrium payoffs are identical to the case where observation is in finitely costly or the first mover's actions are completely unobservable. Applications of our result include standard Stackelberg-Cournot and differentiated product Bertrand games, as well as forms of commitment highlighted in Bolton and Scharfstein (1990) and Bulow, Geanakoplos, and Klemperer (1985).
Keywords: Cournot, Bertrand, Stackelberg, Observation Cost, Value of Commitment, First-Mover Advantage, Second-Mover Advantage, Costly Leader Game
JEL Classification: C72, D83, L13
Suggested Citation: Suggested Citation